Is it worth investing in UK shares?
Past performance is not necessarily a guide to what may happen in future. But it can still provide an interesting perspective on how UK shares have fared over time.
The FTSE 100 has been doing well
Take the flagship FTSE 100 index of leading blue-chip shares, for example.
Over the past decade, it is up by 67%. So, someone who put £15,000 in back then ought now to be sitting on a portfolio worth a little over £25,000.
Not only that, but there have been dividends along the way.
Today, the index yields 3.1%. But someone who invested a decade ago would be earning around 5.1%, thanks to the growth in the index price over those 10 years. So they ought to be earning close to £780 per year in dividends.
Plus, they would have earned dividends every year in the past decade.
Dividends at a company are never guaranteed and one of the benefits of investing in a diversified group of 100 firms is that any one company cutting or cancelling its payout has a limited impact on the overall yield of the index.
What about the FTSE 250?
Of course, the FTSE 100 only represents some of the London market.
The FTSE 250 is composed of small and medium-sized firms. Over the past five years, it is up – but only by 1%!
So, £15,000 invested five years back would now be worth around £15,150.
There is a dividend and, currently standing at 3.9%, the yield is more attractive than the FTSE 100 one. On £15,000, that yield would provide around £585 of passive income per year.
Looking beyond index tracking
It might seem that the lesson is that bigger is better. But a five-year historical snapshot is not necessarily indicative of what to expect in future. I own FTSE 250 as well as FTSE 100 shares.
One way to invest in an index (like either of those) is to buy shares in a tracker fund. An alternative approach can be buying individual UK shares, although when I do this I still make sure my portfolio remains diversified.
Lots of people buy individual shares thinking they can beat the index, but in practice this can be more difficult than it looks.
For example, consider my investment in B&M European Value Retail (LSE: BME).
While the FTSE 250 index has not done much in the past five years, it has at least done far better than B&M. The FTSE 250 retailer’s share price has collapsed 68% during that period. Ouch!
The 7.5% dividend yield is close to double the FTSE 250 average. But even taking that into account, the share has destroyed, not created, value for shareholders over the past five years.
I bought during that price fall, so my loss to date is smaller, but I remain in the red on this particular UK share. B&M has struggled to compete well enough on price in recent years and I see that as an ongoing risk.
But at seven times earnings, I see the current price as a possible bargain and have no plans to sell.
B&M has a large customer base and economies of scale that could potentially help get it back on track.
